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Which is Better: Outsourcing or Shared Services?

People have been arguing for years about the relative merits of outsourcing versus shared services. Yet the debate is more relevant than ever.

Decision makers in technology and elsewhere within large enterprises perennially revisit the subject of using outsourcing versus shared services—in response to changing business conditions including new business strategies, new leadership, a major event such as a merger or acquisition, or maturing business practices.

Given current and future trends in shared services and outsourcing, which approach makes more sense? Is it better to outsource IT or other essential business functions to an outside vendor? Consolidate them to an in-house shared services center? Or perhaps combine the two approaches?

The issue of “outsourcing versus shared services” is a perennial debate and the right answer requires an objective look at the unique requirements of each situation. Unfortunately, decisions often are dominated by a few strong personal opinions and by past experiences that are not relevant.

In my view, outsourcing tends to make the most sense when an organization is looking for fundamental change, wants to move quickly, and views cost reduction as a top priority. The organization acknowledges the vendor’s superior systems, processes, talent, and scale economies—and wants to take advantage of them.

A shared services approach tends to make the most sense when control is a top priority and when the activities in question are unique to the organization—and a competitive differentiator. However, success hinges on having adequate systems, processes, talent, and scale. If these are not on par with what an outsourcing vendor offers, it is hard for shared services to be competitive.

Our experience indicates that change initiatives driven by business units often lean toward outsourcing because the focus is on bottom-line results, rather than on preserving the status quo. Conversely, change initiatives driven by the targeted functions themselves are more likely to adopt a shared services model, which represents a more incremental change.

Offshoring is sometimes thrown into the mix, further clouding the issue. It is important to understand that offshore labor is a viable cost-saving option for outsourcing and shared services. That said, organizations with a strong interest in using offshore labor often favor outsourcing because it saves them the trouble of establishing and managing their own offshore operations. Outsourcing can also help an organization dodge criticism from employees, customers, the media, and the government that it is shipping jobs overseas.

Choosing between outsourcing and shared services does not have to be an either/or decision. Many organizations are best served by a combination of outsourcing and shared services—even within a single business function. Also, many activities can be managed effectively either way. Ultimately, success is not just determined by the approach you choose, but how well you execute it.

Some organizations make the mistake of viewing outsourcing as the holy grail. In reality, a shared services approach often makes good sense—as a stepping stone toward outsourcing, or as a long-term solution. Shared services is most viable as a long-term solution for organizations that have the scale and desire to optimize the processes themselves and for processes where maintaining control is crucial. Examples include applications containing proprietary analytic algorithms that are a source of competitive advantage, or a unique infrastructure architecture that is superior to those available from an outsourcer.

Another subtle but important advantage of a shared services approach is that it provides an opportunity to continuously improve processes, instead of surrendering the benefits from such improvements over to a vendor. Organizations that opt for outsourcing should try to structure the contract so they share in the returns from any future improvements the vendor might make.

Similarly, if an outsourcing vendor will be running the operation with your existing processes and systems—rather than its own—then consider investing in process and systems optimization prior to outsourcing the work. This will enable you to negotiate a better price with the vendor and help ensure a smoother transition. If you outsource a mess, it’s still a mess.

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Editors Choice

CIOs with a bold vision can transform IT operations with emerging technologies and demonstrate to other leaders how to do the same across the enterprise, says Bill Briggs, CTO of Deloitte Consulting LLP. By providing business context that can help their peers understand and evaluate technology’s potential, CIOs can help drive enterprisewide business transformation.

Incoming CIOs may face a raft of decisions about technology projects, business initiatives, and hiring or promoting talent, but the first 100 days of a new CIO’s tenure are a time for learning about and evaluating the business, IT function, talent, and culture. Long- and short-term strategic IT plans built on this solid foundation of knowledge can help new CIOs succeed, according to a recent analysis of data from Deloitte’s CIO Transition Lab.

CIOs transitioning into new IT leadership roles often encounter different opportunities and challenges depending on whether they are internal hires from within the IT team or outside the IT function, external hires, or are leading a team through an M&A or divestiture.

About Deloitte Insights

Deloitte Insights for CIOs couples broad business insights with deep technical knowledge to help executives drive business and technology strategy, support business transformation, and enhance growth and productivity. Through fact-based research, technology perspectives and analyses, case studies and more, Deloitte Insights for CIOs informs the essential conversations in global, technology-led organizations. Learn more